Cotton Prices on International and Domestic Markets Weekly Report

16 January 2017

Cotton prices could now decline over a rise of production in Texas and Xinjiang, resulting in a lower reduction in stocks than earlier expected, as reflected by the January update of USDA data. The weekly cotton report covers the international futures market in New York and China, and the physical indicator "A Index". Domestic cotton prices in China, India and Pakistan are also reviewed through a large number of tables and charts. All data are available for download.

After being previously boosted by speculative buying, the cotton prices could now be depressed by market fundamentals.

The US Department of Agriculture (USDA) has last Thursday released its monthly update, announcing larger stocks than expected at the end of the season, on July 31st.

Cotton futures have therefore retreated back to lower levels in New York, with the nearby contract losing 1.7 cent in the past week or 2.3%.

Raising production, lowering consumption

The USDA has announced a larger production in 2016-17 (August-July) than expected in December, mostly due to higher yields in Texas and Xinjiang.

The global output would reach 22.9 million metric tons this season, against 21 million MT in the past one.

With prices rising everywhere, farmers are tempted to expand cotton areas, as the higher prices eventually offset the rise on input costs.

Cotton yarn production is far from following the same way, partly due to the success of cheaper polyester which is increasingly used in the production of spun yarns.

The USDA has therefore lowered its global data for cotton use from 24.4 to 24.3 million MT in 2016-17.

Higher stocks-to-use ratio than expected

With production rising and consumption dropping, the ending stocks have been increased by 300,000 MT, with the stocks-to-use ratio rising from 79.7% still expected in December, up to 81.1% in January's USDA update.

China's production is no more expected falling this season, whereas cotton use would rise from 7.6 to 7.9 million MT.

As a consequence, China will not import as much cotton yarns as previously expected and cotton use outside China could be reduced.

Ending stocks outside China have been raised and the stocks-to-use ratio has been increased from 51.2% to 52.9%.

This should weigh on cotton prices in the coming period. Fiber substitution at spinning mills could also be stronger than anticipated by the USDA, meaning that mill use could be lower and stocks larger at the end of the season.

China waiting for official sales

In China, cotton futures are far from soaring in line with New York.

With sales from official reserves expected to resume on March 6th, the cotton prices could drop to lower levels, more in line with the international market.

In India, cotton prices have begun dropping in the last days, as larger arrivals were reaching the daily markets.

In Pakistan by contrast, prices have continued rising. According to the USDA, the domestic production could be lower than anticipated, meaning that spinners will have to again import large quantities from India.

With incentives being granted by the government for revamping textile exports, demand for Indian cotton could rebound, and Indian spinners could be confronted with higher cotton prices at home as a result.